India's attempt to become a manufacturer of semiconductors (chips that sit at the heart of electronic products) has been full of mishaps, but things seem to be getting off the ground at last. This is after two false starts.
First, talks with Intel in 2007 to set up a semiconductor fabrication unit, or fab, in India led nowhere. Second, a special economic zone for semiconductor firms, Fab City, was grandly conceived to stretch over 1,000 acres in Andhra Pradesh. Its foundation stone was laid in 2006. The first phase was to be completed by 2009 with a capacity of 30,000 wafers. After more than six years of existence and allotment of land to 15 companies, only three firms have started their projects so far on 64 acres.
Now, after years of deliberation, the government has decided to give in-principle approval to large subsidies for semiconductor units and has identified two projects that could get them. (The process for identifying project proposals to quality for the subsidy began in 2011.) This is expected to give the much-needed push to domestic electronics manufacturing; fabs can act as hubs or mother units for supporting units to come up around them.
The government last year approved subsidies worth Rs 10,000 crore for electronics manufacturing. Around 62 per cent of the incentives for fabs will come under this scheme; the remaining 38 per cent will be given as interest-free loans. The whole move is inspired by the fear that the electronics import bill will be unbearable over time if domestic manufacturing is not encouraged. The government foresees an electronics demand of $400 billion by 2020, and if things continue to run at the current pace, this may involve $300 billion of imports.
This could give a boost to chip design, software development and system design. But the Indian fabs will produce low-end products, such as those needed for energy meters, inverters, set-top boxes, instrumentation panels, micro-ATMs, smart cards and low-end tablets.
The good news is that despite the economic slowdown, India's electronics system design and manufacturing industry is expected to maintain a compounded annual growth rate of 9.9 per cent to reach $94 billion by 2015, according to a study by Frost & Sullivan. At present, 65 per cent of domestic demand is met by imports. What is disturbing is that the share of high-value-added manufacturing in total imports is going down.
The irony is that even as India is trying to make a late entry into the world of chip making, the foremost country in the field, Taiwan, the world's biggest chip maker, is asking: what's in it for us? Many of the country's chip makers are having to live with either low profits or losses. But product makers like Apple and Google, which would not be in business had better and better chips not been forthcoming, are hogging super-profits.
The problem with chip making is that it is a commoditised industry. The likes of Apple make super-profits because they innovate new products that catch the consumer's fancy. Getting a fab or two to make low-end wafers is like entering the low end of a commoditised business. But then, you ought to begin somewhere.
The good part of the India story is that it is strong in chip design and testing and has a foothold in electronic product design, all high-value activities. India's chip design revenue, which is earned largely through exports, grew at the compounded annual rate of 17 per cent in the 2009-12 period, compared to the overall industry rate of 9.9 per cent. Getting a few fabs will not directly add much to value creation, but it can help develop the electronics ecosystem by way of enabling support industries to come up so as to deliver an integrated electronics industry.
Fabs make heavy demands on the world around them. They are usually subsidised (governments across the world vie with each other with subsidy offers to host them) and require a lot of energy and clean water. India, which was so far lagging behind in offering incentives, has made some progress. After the last Budget, the Indian Electronics and Semiconductor Association noted with appreciation several tax features such as the 15 per cent investment allowance in addition to existing depreciation rules, the hike in import duty on set-top boxes and zero important duty on machinery for fabs.
Under free-trade conditions, a country whose economy can support fabs should not have to offer special incentives to attract them. But now India has fallen in line with the rest of the world to offer incentives to attract them with the hope that this will work.
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